Chapter 6
Cost-Volume-Profit Relationships

True/False

1. To estimate what the profit will be at various levels of activity, a manager can simply take the number of units to be sold over the break-even point and multiply that number by the unit contribution margin.
Level: Medium LO: 1 Ans: T

2. Incremental analysis is generally the simplest and most direct approach to decision making.
Level: Easy LO: 1 Ans: T

3. To facilitate decision-making, fixed expenses should be expressed on a per-unit basis.
Level: Medium LO: 1 Ans: F

4. One assumption in CVP analysis is that inventories do not change.
Level: Easy LO: 1 Ans: T

5. On a CVP graph for a profitable company, the total expense line will be steeper than the total revenue line.
Level: Medium LO: 2 Ans: F

6. If sales volume increases, and all other factors remain unchanged, the contribution margin ratio will decrease.
Level: Medium LO: 3 Ans: F

7. The break-even point for a capital intensive, automated company will tend to be higher than for a less capital intensive company while the margin of safety will tend to be lower.
Level: Medium LO: 5,7 Ans: T

8. An increase in the number of units sold will decrease a company’s break-even point.
Level: Medium LO: 5 Ans: F

9. Assuming that the unit contribution margin is positive, a 10% decrease in selling price will increase the break-even point in terms of unit sales more than will a 10% increase in the variable expense.
Level: Hard LO: 5 Ans: T

10. The break-even point is the point where total contribution margin equals total variable expenses.
Level: Medium LO: 5 Ans: F
11. The break-even point can usually be determined by simply adding together all of the expenses from the income statement.
Level: Medium LO: 5 Ans: F

12. Two companies with the same margin of safety